Although it is not over, meme-stock mania looks to be dissipating. Lofty valuations are coming down to Earth as retail investors take their profits. Clover Health Investments (NASDAQ:CLOV) stock is an unfortunate casualty of this trend; the shares of the healthcare technology company are down 47% this year.
Clover Health, a Medicare insurance start-up backed by Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), began trading earlier this year on the Nasdaq after completing a reverse merger with Social Capital Hedosophia Holdings Corp III, one of Chamath Palihapitiya’s SPACs, in a deal valued at $3.7 billion.
Although there was a lot of excitement about the shares due to the company’s asset-light model and Clover Assistant, its web-based platform used by physicians to manage and analyze patient data, CLOV stock became overvalued due to retail investors’ enthusiasm and hype.
So, what’s the incentive to stay interested in this name? Well, in the world of Reddit investing, a short squeeze is always around the corner. Due to the very high short interest of CLOV stock, I would be wary of selling its shares at this stage. As a long-term investment, the company leaves much to be desired. Because its software has so far failed to gain traction among healthcare providers, its growth outlook needs more time to blossom.
Skepticism Towards CLOV Stock Is Building
Since going public earlier this year, Clover Health has been one of the most controversial Medicare insurance providers In February, the U.S. Securities and Exchange Commission (SEC) initiated a probe of the company in response to a critical report on Clover by short-selling specialist Hindenburg Research.
Hindenburg Research issued a strong “sell” rating on CLOV stock, citing an investigation conducted by the U.S. Department of Justice (DOJ) related to unauthorized sales practices. Palihapitiya and the company were fully aware of the DOJ inquiry, which it had not regarded as “material information” that had to be disclosed to its investors, Clover responded.
Previously, in a letter issued by the SEC on Nov. 16, the agency had questioned how Social Capital Hedosophia’s management had determined the enterprise value of Clover. The merger was completed at an initial valuation of $3.5 billion or $10 per share. It was not subject to third-party due diligence.
The SEC also asked Clover to “specifically explain [the] repeated use of the term ‘obvious’ as used to describe [its] Medicare Advantage plans.” In response, the insurer said it used the word “obvious” because it provides most of its members with the lowest average out-of-pocket costs. But that is debatable, considering the broad range of options and plan structures that are available.
So, over the past few months, legal issues have dogged the firm. And CLOV stock has paid the price.
More importantly, health care providers are not flocking to its platform. In an SEC filing, Cover disclosed that it had more than 2,400 primary care providers on its Clover Assistant platform at the end of last year. In comparison, UnitedHealth (NYSE:UNH) has 1.4 million physicians and 6,500 hospitals and facilities in its network.
Clover Assistant Is Not the Only Game in Town
Clover Health is looking to decrease costs with the help of data analysis. According to the company, its proprietary technology platform, Clover Assistant, helps collect, structure, and analyze health and behavioral data. It uses the information to improve medical outcomes and lower costs for patients.
Clover Assistant uses artificial intelligence (AI) technology to gather millions of relevant health data points, including claims, medical charts, and diagnostics, among other metrics.
By analyzing large data pools, it can recognize trends and identify early indicators of potentially expensive outcomes. If the company’s AI is able to successfully identify and address conditions before they result in enormous hospital bills, the company’s cost savings will be huge.
But Clover’s peers also have data-focused technology similar to that of Clover Health. UnitedHealth, for example, uses software to track patient data and clinical visits. Proprietary predictive modeling tools help identify high-risk individuals and create individualized care plans.
A Potential Short-Term Trade
Value investors should maintain a healthy level of skepticism towards CLOV stock. Clover’s historical growth and future potential are already priced into its shares . More mature, profitable peers, meanwhile, are trading at lower valuations.
Clover Assistant does have merit. But the adoption of the platform has been slow. On the bright side, the company has $680 million of cash, while its operations burn an average of $151 million of cash. That gives it a lot of liquidity to manage its operations, make strategic investments, and increase its sales.
At this point, the only reason you should be investing in CLOV stock is to take advantage of meme-stock mania. Considering the name’s short interest, another squeeze could be around the corner.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.